QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2018

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-36500

CymaBay Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

94-3103561

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7999 Gateway Blvd, Suite 130

Newark, CA

94560

(Address of principal executive offices)

(Zip Code)

(510) 293-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 30, 2018, there were 58,768,799 shares of the registrant’s Common Stock outstanding.

See accompanying notes to the condensed consolidatedfinancial statements.

4

CymaBay Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Three Months Ended

March 31,

2018

2017

Operating activities

Net loss

$

(17,005

)

$

(5,351

)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

12

9

Stock-based compensation expense

1,796

1,278

Net accretion and amortization of investments in marketable securities

(278

)

(1

)

Non-cash interest associated with debt discount accretion

92

120

Change in fair value of warrant liability

4,654

2,134

Changes in assets and liabilities:

Accounts receivable

5,000

-

Other current assets

(147

)

(12

)

Prepaid expenses

(159

)

241

Other assets

(346

)

-

Accounts payable

727

197

Accrued liabilities

(781

)

(812

)

Accrued interest payable

(6

)

(6

)

Net cash used in operating activities

(6,441

)

(2,203

)

Investing activities

Purchases of property and equipment

(46

)

-

Purchases of marketable securities

(124,943

)

(9,124

)

Proceeds from maturities of marketable securities

35,334

5,900

Net cash used in investing activities

(89,655

)

(3,224

)

Financing activities

Proceeds from issuance of common stock, net of issuance costs

135,520

9,364

Proceeds from issuance of common stock pursuant to equity award plans

3,276

-

Proceeds from issuance of common stock upon exercise of warrants

656

-

Repayment of facility loan principal

(829

)

(759

)

Net cash provided by financing activities

138,623

8,605

Net increase in cash and cash equivalents

42,527

3,178

Cash and cash equivalents at beginning of period

23,054

10,495

Cash and cash equivalents at end of period

$

65,581

$

13,673

Supplemental disclosure

Cash paid for interest

$

123

192

Supplemental non-cash investing and financing activities

Issuance of common stock upon warrant exercises

$

3,097

-

See accompanying notes to the condensed consolidatedfinancial statements.

5

CymaBay Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Description of Business

CymaBay Therapeutics, Inc. (the “Company” or “CymaBay”) is a clinical-stage biopharmaceutical company focused on developing and providing access to innovative therapies for patients with liver and other chronic diseases with high unmet medical need. The Company’s two key clinical development candidates are seladelpar (MBX-8025) and arhalofenate. Seladelpar is currently being developed for the treatment of primary biliary cholangitis (PBC) and the Company is also developing seladelpar for the treatment of nonalcoholic steatohepatitis (NASH). Arhalofenate is being developed for the treatment of gout and has been out-licensed in the United States. The Company was incorporated in Delaware in October 1988 as Transtech Corporation. The Company’s headquarters and operations are located in Newark, California and it operates in one segment.

Liquidity

The Company has incurred net operating losses and negative cash flows from operations since its inception. During the three months ended March 31, 2018, the Company incurred a net loss of $17.0 million and used $6.4 million of cash in operations. At March 31, 2018, the Company had an accumulated deficit of $467.5 million. CymaBay expects to incur substantial research and development expenses as it continues to study its product candidates in clinical trials. To date, none of the Company’s product candidates have been approved for marketing and sale, and the Company has not recorded any revenue from product sales. As a result, management expects operating losses to continue in future years. The Company’s ability to achieve profitability is dependent primarily on its ability to successfully develop, acquire or in-license additional product candidates, continue clinical trials for product candidates currently in clinical development, obtain regulatory approvals, and support commercialization activities for partnered product candidates. Products developed by the Company will require approval of the U.S. Food and Drug Administration (FDA) or a foreign regulatory authority prior to commercial sale. The regulatory approval process is expensive, time-consuming, and uncertain, and any denial or delay of approval could have a material adverse effect on the Company. Even if approved, the Company’s products may not achieve market acceptance and will face competition from both generic and branded pharmaceutical products.

As of March 31, 2018, the Company’s cash, cash equivalents and marketable securities totaled $229.5 million. The Company believes these funds are sufficient to fund the Company’s current operating plan into 2021. The Company expects to incur substantial expenditures in the future for the development and potential commercialization of its product candidates. Because of this, the Company expects its future liquidity and capital resource needs will be impacted by numerous factors, including but not limited to, the repayment of the Company’s facility loan, ongoing Phase 2b clinical trial activities in NASH, and most significantly, the timing and conduct of additional PBC development activities, including an ongoing Phase 2 clinical trial, a planned Phase 3 clinical trial, and other new drug application (NDA)-enabling studies. The Company has obtained and expects to obtain additional funding to develop its products and fund future operating losses, as appropriate, through equity offerings; debt financing; its existing license and collaboration arrangement with Kowa Pharmaceutical America, Inc (Kowa); one or more possible licenses, collaborations or other similar arrangements with respect to development and/or commercialization rights of its product candidates; or a combination of the above. It is unclear if or when any such transactions will occur, on satisfactory terms or at all. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategies. If adequate funds are not available to the Company, it could have a material adverse effect on the Company’s business, results of operations, and financial condition.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and are comprised of CymaBay and its wholly-owned subsidiary. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP (GAAP) and following the requirements of the United States Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include normal recurring adjustments necessary for the fair presentation of the Company’s financial position and its results of operations and comprehensive loss and its cash flows for the periods presented. These statements do not include all disclosures required by GAAP and should be read in conjunction with the Company’s financial statements and accompanying notes for the fiscal year ended December 31, 2017, which is contained in the Company’s Annual Report on Form 10-K as filed with the SEC on March 15, 2018. The results for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the entire year ending December 31, 2018 or future operating periods.

6

Use of Estimates

The condensed consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. The estimation process often may yield a range of potentially reasonable estimates of actual future outcomes, and management must select an amount that falls within that range of reasonable estimates. Actual results could differ materially from those estimates. The Company believes significant judgment is involved in estimating revenue, stock-based compensation, accrued clinical expenses, and warrant liabilities.

Fair Value of Financial Instruments

The Company’s financial instruments during the periods reported consist of cash and cash equivalents, marketable securities, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued interest payable, accrued expenses, the facility loan, and warrant liabilities. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment. The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and accrued interest payable approximate the related fair values due to the short maturities of these instruments. Based on prevailing borrowing rates available to the Company for loans with similar terms, the Company believes the fair value of the facility loan, considering level 2 inputs, approximates its carrying value.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and maximizes the use of unobservable inputs and is as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are significant to the fair value measurement and are unobservable (i.e. supported by little market activity), which requires the reporting entity to develop its own valuation techniques and assumptions.

The following tables present the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis using the above input categories (in thousands):

As of March 31, 2018

Description

Level 1

Level 2

Level 3

Fair Value

Cash equivalents:

Money market funds

$

45,464

$

-

$

-

$

45,464

Commercial paper

-

14,984

-

14,984

Asset-backed securities

-

4,996

-

4,996

Total cash equivalents

45,464

19,980

-

65,444

Marketable securities:

Commercial paper

-

79,909

-

79,909

Corporate debt securities

-

46,824

-

46,824

Asset-backed securities

-

13,849

-

13,849

U.S. treasury securities

-

23,373

-

23,373

Total short-term investments

-

163,955

-

163,955

Total assets measured at fair value

$

45,464

$

183,935

$

-

$

229,399

Warrant liability

$

-

$

-

$

7,648

$

7,648

Total liabilities measured at fair value

$

-

$

-

$

7,648

$

7,648

7

As of December 31, 2017

Description

Level 1

Level 2

Level 3

Fair Value

Cash equivalents:

Money market funds

$

12,822

$

-

$

-

$

12,822

Commercial paper

-

6,035

-

6,035

Total cash equivalents

12,822

6,035

-

18,857

Marketable securities:

Commercial paper

-

35,886

-

35,886

Corporate debt securities

-

19,760

-

19,760

Asset-backed securities

-

11,060

-

11,060

U.S. treasury securities

-

7,450

-

7,450

Total short-term investments

-

74,156

-

74,156

Total assets measured at fair value

$

12,822

$

80,191

$

-

$

93,013

Warrant liability

$

-

$

-

$

6,091

$

6,091

Total liabilities measured at fair value

$

-

$

-

$

6,091

$

6,091

The Company estimates the fair value of its corporate debt, commercial paper, asset backed securities, and U.S. treasury securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

There were no transfers between Level 1 and Level 2 during the periods presented.

The Company holds a Level 3 liability associated with common stock warrants that were issued in connection with the Company’s financings completed in September and October 2013, January 2014, and August 2015. The warrants are accounted for as liabilities. Beginning in September 2017, the Company changed its valuation technique and began to value its warrant liability using a Black-Scholes option pricing model, the inputs for which include: exercise price of the warrants, market price of the underlying common shares, dividend yield, expected term, expected volatility, and a risk-free interest rate. Changes to any of these inputs can have a significant impact on the estimated fair value of the warrants.

Historically, the Company used a binomial option pricing model to value its warrant liabilities. The inputs for the binomial model are similar to the Black-Scholes model but also incorporate other more complex inputs that, in the Company’s case, have previously included the expected timing, probability and valuation impact of certain potential strategic events. Management concluded that no potential strategic events were expected to occur that, upon their announcement, could significantly impact the warrant liabilities valuation prior to their expiration beginning in late 2018 and ending in early 2019.

The following table sets forth an activity summary which includes the changes in the fair value of the Company’s Level 3 financial instruments (in thousands):

For the Three

Months Ended March 30,

2018

2017

Balance, beginning of period

$

6,091

$

1,145

Issuance of financial instruments

-

-

Change in fair value

4,654

2,134

Settlement of financial instruments

(3,097

)

-

Balance, end of period

$

7,648

$

3,279

8

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with a remaining maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest-bearing, demand money market accounts, corporate debt securities, and commercial paper.

The Company invests excess cash in marketable securities with high credit ratings that are classified in Level 1 and Level 2 of the fair value hierarchy. These securities consist primarily of corporate debt, commercial paper, asset-backed securities, and U.S. treasury securities and are classified as “available-for-sale.” The Company considers marketable securities as short-term investments if the maturity date is less than one year from the balance sheet date. The Company considers marketable securities as long-term investments if the maturity date is in excess of one year of the balance sheet date.

Realized gains and losses from the sale of marketable securities, if any, are calculated using the specific-identification method. Realized gains and losses and declines in value judged to be other-than-temporary are included in interest income or expense in the statements of operations and comprehensive loss. Unrealized holding gains and losses are reported in accumulated other comprehensive loss in the balance sheets. To date, the Company has not recorded any impairment charges on its marketable securities related to other-than-temporary declines in market value. In determining whether a decline in market value is other-than-temporary, various factors are considered, including the cause, duration of time and severity of the impairment, any adverse changes in the investees’ financial condition, and the Company’s intent and ability to hold the security for a period of time sufficient to allow for an anticipated recovery in market value.

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration of credit risk to the extent of the fair value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in highly liquid instruments that bear minimal risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents and investments and issuers of investments to the extent recorded on the balance sheets.

9

Certain materials and key components that the Company utilizes in its operations are obtained through single suppliers. Since the suppliers of key components and materials must be named in an NDA filed with the U.S. Food and Drug Administration (FDA) for a product, significant delays can occur if the qualification of a new supplier is required. If delivery of material from the Company’s suppliers were interrupted for any reason, the Company may be unable to supply any of its product candidates for clinical trials.

Revenue Recognition

At the inception of an arrangement, the Company evaluates if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For contracts with customers, the Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation. The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company's performance obligations are transferred to customers at a point in time, typically upon delivery.

The Company enters into collaboration arrangements, under which it licenses certain rights to its intellectual property to third parties. The terms of these agreements may include payment to the Company of one or more of the following: nonrefundable, upfront license fees; development and commercial milestone payments; funding of research and/or development activities; and royalties on net sales of licensed products. Each of these types of payments are classified as collaborative revenues except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

For each collaboration agreement that results in revenues, the Company identifies all material promised goods and services, which may include a license to intellectual property and know-how, research and development activities and/or transition activities. Promised goods or services are considered to be separate performance obligations if they are distinct. In order to determine the transaction price to be allocated to each performance obligation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis. The Company must develop assumptions that require judgment to determine the standalone selling price (SSP) in order to account for these agreements. To determine the standalone selling price the Company’s assumptions may include (i) assumptions regarding the probability of obtaining marketing approval for the drug candidate, (ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate, (iii) estimates of future cash flows from potential product sales with respect to the drug candidate and (iv) appropriate discount and tax rates. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

Upfront License Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for

10

purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Development and Regulatory Milestone Payments: Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone in the estimated transaction price using the most likely amount method or that it is appropriate to fully constrain the milestone. A milestone payment is included in the transaction price in the reporting period that the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. These milestones remain fully constrained until the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.

Sales-based Milestone and Royalty Payments: The Company’s collaborators may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products. The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

Common Stock Warrant Liability

The Company’s outstanding common stock warrants issued in connection with certain equity and debt financings that occurred in 2013 through 2015 are classified as liabilities in the accompanying condensed consolidated balance sheets because of certain contractual terms that preclude equity classification. The Company estimates the fair value of common stock warrants at each reporting period until the earlier of the exercise of the warrants, at which time the liability will be revalued and reclassified to stockholders’ equity, or expiration of the warrants. The determination of fair value of these common stock warrants requires management to make certain assumptions regarding subjective input variables such as timing, probability and valuation impact of certain potential strategic events, expected term, dividends, expected volatility and risk-free interest rates. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease other (expense) income, net, which could be material to the Company’s results of operations.

Stock-Based Compensation

Employee and director stock-based compensation is measured at fair value on the grant date of the award. Compensation cost is recognized as expense on a straight-line basis over the vesting period for stock options with time-based vesting and on an accelerated basis for stock options with performance conditions. For stock options with performance conditions, the Company evaluates the probability of achieving performance conditions at each reporting date. The Company begins to recognize the expense when it is deemed probable that the performance conditions will be met. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The determination of fair value for stock-based awards using an option-pricing model requires management to make certain assumptions regarding subjective input variables such as expected term, dividends, volatility and risk-free interest rate. The Company is also required to make estimates as to the probability of achieving the specific performance criteria. If actual results are not consistent with the Company’s assumptions and judgments used in making these estimates, the Company may be required to increase or decrease compensation expense, which could be material to the Company’s results of operations.

Equity awards granted to non-employees are valued using the Black-Scholes option pricing model. Stock-based compensation expense for nonemployee services is subject to remeasurement as the underlying equity instruments vest and is recognized as an expense over the period during which services are received.

Net Loss Per Common Share

Basic net loss per share of common stock is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock is calculated as the weighted average number of shares of common stock outstanding adjusted to include the assumed exercises of stock options and common stock warrants, if dilutive.

11

The calculation of diluted loss per share also requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the common stock warrants and the presumed exercise of such securities are dilutive to net loss per share for the period, adjustments to net loss used in the calculation are required to remove the change in fair value of the common stock warrant liability for the period. Likewise, adjustments to the denominator are required to reflect the related dilutive shares.

In all periods presented, the Company’s outstanding stock options, incentive awards and warrants were excluded from the calculation of diluted net loss per share because their effects were antidilutive. The Company’s computation of basic and diluted net loss per share is as follows (in thousands, except share and per share amounts):

Three Months Ended

March 31,

2018

2017

Numerator:

Net loss allocated to common stock-basic

$

(17,005

)

$

(5,351

)

Adjustments for revaluation of warrants

-

-

Net loss allocated to common stock-diluted

$

(17,005

)

$

(5,351

)

Denominator:

Weighted average number of common stock

shares outstanding - basic

53,752,753

26,609,931

Weighted average number of common stock

shares outstanding - diluted

53,752,753

26,609,931

Net loss per share - basic:

$

(0.32

)

$

(0.20

)

Net loss per share - diluted:

$

(0.32

)

$

(0.20

)

The following table shows the total outstanding common stock equivalents considered anti-dilutive and therefore excluded from the computation of diluted net loss per share (in thousands):

Three Months Ended

March 31,

2018

2017

Warrants for common stock

982

1,667

Common stock options

4,968

3,328

Performace-based stock options

205

327

Incentive awards

130

239

6,285

5,561

Recently Adopted Accounting Pronouncements

Accounting Standards Update 2014-09

On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) (ASC 606) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company also elected to use the practical expedient that allows an entity to expense the incremental cost of obtaining a contract as an expense when incurred if the amortization period of the asset that an entity otherwise would have recognized is less than one year. Results for the three months ended March 31, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting under previous revenue recognition guidance. As of the adoption date, the Company had only one contract with a customer, Kowa Pharmaceuticals America, Inc. (“Kowa”), that had not been completed. Based on the Company’s review, the Company concluded there was no significant change in applying ASC 606 to the contract with Kowa and no amounts have been recognized within “accumulated deficit” in the condensed consolidated balance sheet related to the adoption of the new standard.

Accounting Standards Update 2017-09

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)- Scope of Modification Accounting (ASU 2017- 09). The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in ASU

12

2017-09 became effective for the Company on January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

Staff Accounting Bulletin No. 118

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“the Act”). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax. In December 2017, SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the accounting implications of recently enacted U.S. federal tax reform. SAB 118 allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date to address ongoing guidance and tax interpretations that are expected over the next 12 months. The Company has adopted SAB 118 and currently considers its accounting of the impact of U.S. federal tax reform to be incomplete but continues to make a reasonable estimate of the effects on our existing deferred tax assets. The Company expects to complete the remainder of the analysis within the measurement period in accordance with SAB 118. Adjustments, if any, are not expected to impact the statement of operations and comprehensive loss due to the full valuation allowance on the Company’s deferred tax assets.

Recently Issued Accounting Pronouncements

Accounting Standards Update 2016-02

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, the lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and the liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. As currently issued, entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. There are additional optional practical expedients that an entity may elect to apply. In January 2018, the FASB issued an exposure draft of the proposed ASU, Leases (Topic 842):Targeted Improvements. The proposed ASU provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. Management intends to adopt the standard on the effective date but has not yet selected a transition method. Management is in the process of inventorying and scoping the Company’s population of leased assets in order to assess the impact of Topic 842. Topic 842 is expected to impact the Company’s condensed consolidated financial statements as the Company has certain operating lease arrangements for which it is the lessee. Management is currently evaluating the impact adoption of Topic 842 will have on the Company’s financial position and results of operations but management anticipates the recognition of additional assets and corresponding liabilities on the Company’s condensed consolidated balance sheet related to leases.

Accounting Standards Update 2017-11

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815) (ASU 2017-11): (Part I)Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. The ASU allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for and classified as liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-linked freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using

13

a full or modified retrospective approach. We are currently evaluating the impact of the revised guidance on its condensed consolidated financial statements.

3. Certain Balance Sheet Items

The following table shows certain balance sheet items (in thousands):

March 31,

December 31,

2018

2017

(unaudited)

Accrued compensation

$

867

$

2,416

Accrued pre-clinical and clinical trial expenses

3,467

2,929

Accrued professional fees

523

288

Other accruals

119

124

Total accrued liabilities

$

4,976

$

5,757

4. Collaboration and License Agreements

Kowa Pharmaceuticals America, Inc.

On December 30, 2016, the Company entered into a license agreement with Kowa. Pursuant to the license agreement, the Company granted to Kowa an exclusive license, and right to sublicense, certain patent rights and technology related to arhalofenate. Kowa will have exclusive rights to, among other things, develop, use, manufacture, sell and otherwise exploit the licensed technology in the United States (including all possessions and territories). At Kowa’s option, the Company may also facilitate the placement of arhalofenate product manufacturing orders under the terms of the Company’s existing contract manufacturing agreements. In addition, the Company will complete specified in-process stability testing and non-clinical development services and will participate on a Joint Advisory Committee (JAC). Finally, the Company will transfer to Kowa certain arhalofenate product on hand.

Under the license agreement, Kowa agreed to pay the Company a non-refundable upfront payment of $5.0 million upon contract execution. Kowa also agreed to pay the Company $5.0 million upon initiation of a study evaluating the pharmacokinetics of arhalofenate in subjects with renal impairment, which occurred during the quarter ended December 31, 2017 and was received in January 2018. An additional milestone payment of $5.0 million is due on initiation of a Phase 3 study of arhalofenate, and up to $190.0 million based upon the achievement of other specific development and sales milestones. Finally, the Company will receive tiered, double digit royalties on any product sales and a percentage of any sublicensing revenue earned by Kowa.

Kowa may terminate the agreement by giving a 45 day notice to the Company three months after the effective date of the agreement and any time thereafter with a 90 day notice. Unless terminated early, the agreement has a term that ends on the later of the (i) expiration of the last to exist valid claim covering the manufacture, use and sale of arhalofenate in the United States and (ii) the 10th anniversary of the first commercial sale. The license agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcy of the other party or for safety reasons. Upon early termination, the license and know how all revert back to the Company.

The Company concluded that Kowa is a customer, and the contract is not subject to accounting literature on collaborative arrangements. This is because the Company granted to Kowa a license to its intellectual property, and provided drug product and research and pre-clinical development services, all of which are outputs of the Company’s ongoing activities, in exchange for consideration. The Company identified the following three material promises under the license agreement: 1) transfer of a license to intellectual property, inclusive of the related technology know-how conveyance and contract manufacturing rights and privileges (“license and know-how”); 2) the obligation to perform specific ongoing research and non-clinical development services, and 3) the delivery of existing on hand arhalofenate clinical product. The Company’s participation on the JAC was determined to not be a performance obligation as its participation in the JAC is not required, and is primarily for the Company’s benefit, to appraise itself of the progress of Kowa’s activities. The Company provided to Kowa standard indemnification and protection of licensed intellectual property, which is part of assurance that the license meets the contract’s specifications and is not an obligation to provide goods or services.

The Company concluded that the license and know-how, the research and development services, and delivery of arhalofenate product were each by themselves distinct. The Company concluded that Kowa has the ability to benefit from the license and know-how on its own by developing and commercializing arhalofenate using its own resources, and also the ability to sublicense and manufacture arhalofenate. The research and non-clinical development services promised will not significantly change the intellectual property underlying the license. Further, the Company believes that Kowa has research and development expertise with compounds

14

similar to those licensed under the agreement. The research and development services and arhalofenate product are not integrated or dependent upon each other, and are provided by the Company separately from each other. The licensed intellectual property was considered to be functional as it has significant standalone functionality, and grants Kowa the right to use the Company’s intellectual property as it exists on the effective date of the license. Accordingly, license revenue was recognized upon the substantial completion of the license technology transfer during 2017. The research and non-clinical development services are transferred as the services are performed, with cost used as the measure of progress. The arhalofenate product was transferred when Kowa assumed title and control of the inventory stored at the Company’s contract manufacturer upon entering into a direct contract with such manufacturer in the fourth quarter of 2017.

To allocate transaction price among the three performance obligations, the Company estimated their SSP. For the license and know-how, the SSP was estimated using the income approach based on assumptions regarding Kowa’s future revenues from the licensed intellectual property, projected costs of research and development, manufacturing and commercialization expenses, as well as the discount rate, the development timeline, and probabilities of technical and regulatory success. To estimate SSP of research and non-clinical development services and arhalofenate product on hand, the Company used a cost-plus margin approach. The Company believes that a change in the assumptions used to determine its best estimate of selling price for the performance obligations would not have a significant effect on the allocation of consideration received to the performance obligations.

As of January 1, 2018, the transaction price was limited to $10.0 million, consisting of the $5.0 million due upon contract initiation and the $5.0 million triggered when Kowa initiated the study evaluating the pharmacokinetics of arhalofenate in subjects with renal impairment. Of these amounts, the Company allocated $9.5 million to the license; $0.4 million to the arhalofenate product; and $0.1 million to the research and pre-clinical development services. As of January 1, 2018, all of these performance obligations had been completed and the associated revenue had been recognized.

The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at March 31, 2018. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and Kowa’s efforts. Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Kowa. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

The Company expensed the incremental costs of obtaining the Kowa contract prior to December 31, 2017, as substantially all costs related to the performance obligations completed by that date.

Revenue recognized during the three months ended March 31, 2017 was determined in accordance with the accounting rules applicable prior to the adoption of ASC 606 on January 1, 2018. There was no difference in the revenue recognized under ASC 606 or legacy GAAP for the three months ended March 31, 2018.

There were no contract assets or deferred revenues (contract liabilities) during the quarter ended March 31, 2018. Accounts receivable from the Kowa contract consisted of the following (in thousands):

March 31,

December 31,

2018

2017

Accounts receivable

$

-

$

5,000

As of March 31, 2018, there were no amounts included in the transaction price and allocated to goods and services not yet provided.

Janssen Pharmaceutical NV and Janssen Pharmaceuticals, Inc.

In June 2006, the Company entered into an exclusive worldwide, royalty-bearing license to seladelpar and certain other PPARδ compounds (the PPARδ Products) with Janssen Pharmaceutical NV (Janssen NV), with the right to grant sublicenses to third parties to make, use and sell such PPARδ Products. Janssen NV has a right of first negotiation under the agreement to license a particular licensed patents covering the PPARδ Product from the Company in the event that the Company elects to seek a third party corporate partner for the research, development, promotion, and/or commercialization of such PPARδ Products. Under the terms of the agreement Janssen NV is entitled to receive up to an 8% royalty on net sales of PPARδ Products.

In June 2010, the Company entered into two development and license agreements with Janssen Pharmaceuticals, Inc. (Janssen), a subsidiary of Johnson and Johnson, to further develop and discover undisclosed metabolic disease target agonists for the treatment of Type 2 diabetes and other disorders. The Company received a termination notice from Janssen, effectively ending these development and licensing agreements in early April 2015. In December 2015, the Company exercised an option, and Janssen granted the Company

15

an exclusive, worldwide license with rights to sublicense, pursuant to the terms of one of the original agreements to continue to develop compounds with activity against an undisclosed metabolic disease target. No amounts were incurred or accrued for this agreement as of and for the three months ended March 31, 2018 and 2017.

DiaTex, Inc.

In June 1998, the Company entered into a license agreement with DiaTex, Inc. (DiaTex) relating to products containing halofenate, its enantiomers, derivatives, and analogs (the licensed products). The license agreement provides that DiaTex and the Company are joint owners of all of the patents and patent applications covering the licensed products and methods of producing or using such compounds, as well as certain other know-how (the covered IP). As part of the license agreement, the Company received an exclusive worldwide license, including as to DiaTex, to use the covered IP to develop and commercialize the licensed products. The Company also retained the right to sub-license the covered IP. The license agreement contains a requirement to make additional payments for development achievements and royalty payments on any sales of licensed products containing arhalofenate. No development payments were made or became due as of and for the three months ended March 31, 2018 and 2017 and no royalties have been paid to date. In December 2016, the agreement was amended by the parties to change the timing of a specified development milestone.

5. Facility Loans

On September 30, 2013, the Company entered into a facility loan agreement with Silicon Valley Bank and Oxford Finance LLC (referred to herein as the lenders) for a total loan amount of $10.0 million of which the first tranche of $5.0 million was drawn as part of the Company’s September 2013 financing, referred to herein as the 2013 Term Loan Facility. The second tranche of $5.0 million was not drawn down by the Company and expired on June 30, 2015.

At the time the first $5.0 million tranche of the 2013 Term Loan Facility was drawn down, the Company issued warrants exercisable for a total of 121,739 shares of the Company’s common stock to the lenders at an exercise price of $5.00 per share with a term of seven years.

On August 7, 2015, the Company entered into a Loan and Security Agreement pursuant to which it refinanced its existing 2013 Term Loan Facility with Oxford Finance LLC and Silicon Valley Bank, for an aggregate amount of up to $15.0 million, referred to herein as the 2015 Term Loan Facility. The first $10.0 million tranche of this new loan facility was made available to the Company immediately upon the closing and was used in part to retire all $4.1 million of the Company’s existing debt outstanding under the 2013 Term Loan Facility, and to settle accrued interest and closing costs with the lenders. The remaining $5.0 million, referred to as the second tranche, was not drawn down by the Company and expired on March 31, 2016. The modified loan terms weretreated as a modification and the remaining debt discount costs are being amortized over the remaining term of the Loan and Security Agreement using the effective interest rate method.

The first loan tranche bears interest at 8.77%, a rate that was determined on the advance date as being the greater of (i) 8.75% and (ii) the sum of 8.47% and the 90 day U.S. LIBOR rate reported in the Wall Street Journal three business days prior to the funding date of the first tranche. For the first tranche, the Company is required to make 12 monthly interest only payments after the funding date followed by a repayment schedule equal to 36 equal monthly payments of interest and principal. Upon maturity, the remaining balance of the first tranche and a final payment equal to 6.50% of the original principal amount advanced of the applicable tranche are payable.

At the closing, the Company also agreed to pay a facility fee of 1.00% of the 2015 Term Loan Facility commitment. In addition, the Company issued warrants exercisable for a total of 114,436 shares of its common stock to the lenders at an exercise price of $2.84 per share, and with a term of ten years.

The 2015 Term Loan Facility contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company, and also includes defined customary events of default that include but are not limited to a material adverse change in the Company’s business, operations or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the term loan, or a material impairment in the perfection or priority of the collateral agent’s lien in the collateral or in the value of such collateral. As of March 31, 2018, the Company was in compliance with the term loan covenants and there were no events of default.

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6. Commitments and Contingencies

The Company leases 8,894 square feet of office space in Newark, California pursuant to a lease which commenced January 16, 2014 and expires on January 15, 2019. Rent expense was $0.1 million for each of the three months ended March 31, 2018 and 2017.

Future minimum lease payments are as follows (in thousands):

Lease

Payments

Year ending December 31, 2018

(from April to December)

$

171

Total future minimum payments

$

171

7. Stockholders’ Equity

As of March 31, 2018, and December 31, 2017, the Company had reserved shares of authorized but unissued common stock as follows:

March 31,

December 31,

2018

2017

(unaudited)

Common stock warrants

982,456

1,460,955

Equity incentive plans

5,574,766

4,021,983

Total reserved shares of common stock

6,557,222

5,482,938

On February 1, 2018, pursuant to ashelf registration statement on Form S-3, the Company completed the issuance of 13,340,000 shares of its common stock at $10.80 per share in an underwritten public offering (referred to as the February 2018 public offering). Net proceeds to the Company in connection with the February 2018 public offering were approximately $135.5 million after deducting underwriting discounts, commissions and other offering expenses.

8. Stock Plans and Stock-Based Compensation

Stock Plans

On January 1, 2018, the share reserve of the Company’s 2013 Equity Incentive Plan (2013 Plan), automatically increased by 2,220,439 shares. During the three months ended March 31, 2018, the Company granted options to purchase 1,522,272 of its common stock to its employees, directors and a consultant. As of March 31, 2018, there were 271,985 shares available for grant under the 2013 Plan.

Stock-Based Compensation Expense

Stock-based compensation expense recorded was as follows (in thousands):

Three Months Ended

March 31,

2018

2017

(unaudited)

Research and development

$

649

$

361

General and administrative

1,147

917

Total

$

1,796

$

1,278

9. Related-Party Transactions

The Company paid a former member of its Board of Directors, who is also a member of its Scientific and Clinical Advisory Boards, a total of $15,000 for each of the three months ended March 31, 2018 and 2017, in monthly cash retainers.

17

10. Subsequent Event

On April 19, 2018, the Company entered into an amended lease to extend the term of its original lease to January 15, 2024 and relocate and expand its office space within the same office park in Newark, California. The Company has an option to further extend the term of the amended lease for an additional five years, which would commence upon the expiration of the term. The lease amendment was effective as of April 16, 2018, and the Company expects to take possession of the new space in late 2018. Annual rental payments under the amended lease total approximately $0.7 million, and the Company will also pay a portion of common area and pass-through expenses.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating results for the three months ended March 31, 2018, are not necessarily indicative of results that may occur in future interim periods or for the full fiscal year.

This Quarterly Report on Form 10-Q contains statements indicating expectations about future performance and other forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, that involve risks and uncertainties. We usually use words such as “may,” “will,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” or the negative of these terms or similar expressions to identify these forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current expectation, belief or intent, primarily with respect to our operations and related industry developments. Examples of these statements include, but are not limited to, statements regarding the following: our business and scientific strategies; the progress of our and our collaborators’ product development programs, including clinical testing, and the timing of results thereof; our corporate collaborations and revenues that may be received from our collaborations and the timing of those potential payments; our expectations with respect to regulatory submissions and approvals; our drug discovery technologies; our research and development expenses; protection of our intellectual property; sufficiency of our cash and capital resources and the need for additional capital; and our operations and legal risks. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of the risks and uncertainties discussed under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, and under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K, filed with the SEC on March 15, 2018. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

CymaBay Therapeutics, Inc. is a clinical-stage biopharmaceutical company focused on developing and providing access to innovative therapies for patients with liver and other chronic diseases with high unmet medical need.

Our lead product candidate, seladelpar, is a potent and selective agonist of PPARδ, a nuclear receptor that regulates genes involved in bile acid/sterol, lipid and glucose metabolism and inflammation. We are currently developing seladelpar for the treatment of primary biliary cholangitis (PBC), an autoimmune disease that causes progressive destruction of the bile ducts in the liver. We are also developing seladelpar for the treatment of nonalcoholic steatohepatitis (NASH), a prevalent and serious chronic liver disease caused by excessive fat accumulation in the liver that results in inflammation and cellular injury that can progress to fibrosis and cirrhosis, and potentially liver failure and death.

Data from two Phase 2 studies of seladelpar in patients with PBC have established seladelpar’s anti-cholestatic and anti-inflammatory effects. In April 2018, we announced updated positive interim results from an ongoing low-dose Phase 2 study of seladelpar in patients with PBC. As of January 2018, 71 patients were exposed to at least one dose of seladelpar, of whom 53 received 12 weeks of treatment and 42 received 26 weeks of treatment. In the first part of the study, patients with an inadequate response to ursodeoxycholic acid (UDCA), as characterized by a persistent elevation in alkaline phosphatase (AP), or who were intolerant to UDCA, received either 2 mg, 5 mg or 10 mg of seladelpar once-daily through 12 weeks. At baseline, mean AP was 358, 333, and 262 U/L in the 2 mg, 5 mg, and 10 mg groups, respectively. At 12 weeks, changes in AP were -21%, -33%, and -45% in the 2 mg (N=6), 5 mg (N=25), and 10 mg (N=22) groups, respectively. After 12 weeks, dose titration was permitted for patients whose AP remained above normal and at a level where additional AP lowering had the potential to reduce the risk of disease progression. At 26 weeks, decreases in AP were similar across regimens at -45%, -43%, and -43% in the 5 mg (N=13), 5 to 10 mg titration (N=6) and 10 mg (N=19) groups, respectively. AP is a recognized biomarker of cholestasis. Reaching an AP level of less than 1.67 the upper limit of normal (ULN) after one year of treatment along with a decrease in AP of at least 15% from baseline are two key components in the composite endpoint used for regulatory approval; a third element in the composite endpoint is having normal levels of total bilirubin at one year. At 26 weeks, 69%, 67%, and 79% of patients in the 5 mg, 5 to 10 mg titration and 10 mg dose regimens, respectively, had an AP less than 1.67 times the upper limit of normal, with at least a 15% decrease in AP from baseline and normal bilirubin. Overall, 29% of patients had a normal AP at 26 weeks.

In addition to the reduction in AP, patients in both the 5 mg and 10 mg dose groups experienced decreases in other liver markers of cholestasis including gamma glutamyl transferase and total bilirubin. Seladelpar also improved metabolic and inflammatory markers with patients experiencing decreases in levels of low-density lipoprotein-C and high sensitivity C-reactive protein.

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At 12 weeks, median transaminase changes were -9%, -28%, and -35% in the 2 mg, 5 mg, and 10 mg groups, respectively and decreases were maintained at 26 weeks in the 5 mg and 10 mg groups (≥ -40%). These decreases further support seladelpar’s anti-inflammatory activity.

Many PBC patients suffer from pruritus, or chronic itching, which can significantly impact their quality of life. Consistent with prior studies, seladelpar was not associated with drug-induced pruritus. Baseline median pruritus as measured by the visual analog scale (VAS) which measures pruritus and its severity on a scale of 0 to 100 mm was 19 and 27 mm in the 5 mg or 5 mg to 10 mg titration and 10 mg groups, respectively, and patients in the 10 mg group experienced consistent decreases during treatment (-24% at week 26) suggesting potential anti-pruritic activity. Seladelpar was generally safe and well tolerated, with no transaminase elevation safety signal. There were six serious adverse events and none were deemed related to seladelpar.

The current study remains ongoing and is expected to enroll a total of 109 patients. We expect to report another subset of data through 52-weeks of dosing in the second half of 2018. In the first half of 2018, we also plan to conclude discussions with the FDA and European Medicines Agency (EMA), respectively, in order to finalize the design of our Phase 3 study of seladelpar in patients with PBC, which we intend to initiate in the second half of 2018.

In November 2016, the FDA granted orphan drug designation to seladelpar for the treatment of PBC, and in September 2017, the EMA’s Committee for Orphan Medicinal Products (COMP) similarly granted orphan drug designation to seladelpar for the treatment of PBC. In October 2016, seladelpar received EMA PRIority MEdicines (PRIME) designation for the treatment of PBC.

We believe that seladelpar could also have utility in the treatment of NASH. Seladelpar was found to reverse NASH pathology, decrease fibrosis, inflammation, hepatic lipids and reverse insulin resistance in the foz/foz mouse, which is a diabetic obese model of NASH. In April 2018, we initiated screening a double-blind, randomized, placebo-controlled phase 2b clinical study evaluating the safety and efficacy of 10, 20 and 50 mg of seladelpar versus placebo in patients with NASH for 52 weeks. The primary objectives of the study are to evaluate the effect of seladelpar on hepatic fat, as assessed by magnetic resonance imaging-proton density fat fraction (MRI-PDFF) at week 12 and to evaluate the safety and tolerability of seladelpar in subjects with NASH. The study is intended to enroll a total of 175 patients with liver biopsy-proven NASH in a 2:2:2:1 randomization between 10, 20 and 50 mg of seladelpar and placebo. Among various secondary objectives includes evaluation of histological improvement in NASH and fibrosis as assessed by comparing liver biopsy samples taken at baseline and 52 weeks.

Our second product candidate, arhalofenate, is a dual-acting anti-inflammatory and uric acid lowering agent being developed for the treatment of gout. In 2016, we entered into an exclusive licensing agreement granting Kowa Pharmaceuticals America, Inc. the rights to develop and commercialize arhalofenate in the United States (including all possessions and territories). Under the terms of the agreement with Kowa, we received an up-front payment of $5.0 million, and a milestone payment of $5.0 million for the initiation of a study evaluating the pharmacokinetics of arhalofenate in subjects with renal impairment. We are entitled to receive an additional milestone payment of $5.0 million on the initiation of a Phase 3 study and up to an additional $190.0 million in payments based upon the achievement of specific development and sales milestones. We are also eligible to receive tiered, double digit royalties on future sales of arhalofenate products. Kowa will be responsible for all development and commercialization costs. We retain full development and commercialization rights for the rest of the world and intend to partner arhalofenate in geographies outside the United States and its possessions and territories.

Equity Financings

On July 25, 2014, we completed a public offering of 4,600,000 shares of our common stock at $5.50 per share which we refer to as our 2014 public offering. Net proceeds to us in connection with the 2014 public offering were approximately $23.0 million after deducting underwriting discounts, commissions and offering expenses.

On November 7, 2014, we filed a $100 million registration statement on Form S-3 with the SEC, which registration statement included an at-the-market facility (ATM) with Cantor Fitzgerald & Co to sell up to $25 million of common stock under the registration statement. We sold shares of common stock under the ATM with aggregate net proceeds to us of $4.5 million. We terminated the ATM in March 2017.

On July 27, 2015, pursuant to our shelf registration statement on Form S-3, we completed the issuance of 8,188,000 shares of our common stock at $2.81 per share, which we refer to as our 2015 public offering. Net proceeds to us in connection with the 2015 public offering were approximately $21.1 million after deducting underwriting discounts, commissions and other offering expenses.

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On February 7, 2017, pursuant to our shelf registration statement on Form S-3, we completed the issuance of 5,181,348 shares of our common stock at $1.93 per share, which we refer to as our February 2017 public offering. Net proceeds to us in connection with the February 2017 public offering were approximately $9.2 million after deducting underwriting discounts, commissions and other offering expenses.

On May 11, 2017 we filed a $100 million shelf registration statement on Form S-3, which was declared effective on June 29, 2017, and our prior shelf registration statement was deemed terminated. This new shelf registration statement included an at-the-market facility (New ATM) to sell up to $25 million of common stock under the new registration statement. We terminated the New ATM in July 2017.

On July 24, 2017, pursuant to the $100 million shelf registration statement on Form S-3, we completed the issuance of 14,950,000 shares of our common stock at $6.50 per share, which we refer to as our July 2017 public offering. Net proceeds to us in connection with the July 2017 public offering were approximately $91.1 million after deducting underwriting discounts, commissions and other offering expenses.

On December 29, 2017 we filed a new $200 million shelf registration statement on Form S-3, which was declared effective on January 19, 2018, and our prior shelf registration statement was deemed terminated.

On February 1, 2018, pursuant to our $200 million shelf registration statement on Form S-3, we completed the issuance of 13,340,000 shares of our common stock at $10.80 per share, which we refer to as our February 2018 public offering. Net proceeds to us in connection with the February 2018 public offering were approximately $135.5 million after deducting underwriting discounts, commissions and other offering expenses.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We consider certain accounting policies including, but not limited to, revenue recognition, research and development expenses and clinical accruals, stock-based compensation and valuation of warrant liabilities to be critical policies. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe to be materially reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may materially differ from these estimates under different assumptions or conditions. For further information on all of our significant accounting policies, except for revenue recognition which is discussed further below, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 15, 2018.

Revenue Recognition

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC Topic 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method, for all contracts that had not been completed as of that date. As of the adoption date, we had entered into one out-licensing agreement that was within the scope of ASC 606, under which we have licensed our product candidate rights to a third party. The term of this arrangement included the following: a non-refundable, up-front license fee, development and commercial milestone payments, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when the customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we apply the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. We then allocate the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation. We recognize the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance

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obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery.

Upfront License Fees: If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Development and Regulatory Milestone Payments: Depending on facts and circumstances, we may conclude that it is appropriate to include a milestone payment in the estimated transaction price using the most likely amount method or that it is appropriate to fully constrain the milestone. A milestone payment is included in the transaction price in the reporting period that we conclude that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. We may record revenues from certain milestones in a reporting period before the milestone is achieved if we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We record a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. These milestones remain fully constrained until we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We re-evaluate the probability of achievement of such development milestones and any related constraint each reporting period. We adjust our estimate of the overall transaction price, including the amount of collaborative revenue that was recorded, if necessary.

Sales-based Milestone and Royalty Payments: Our collaborators may be required to pay us sales-based milestone payments or royalties on future sales of commercial products. We recognize revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license our intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

We receive payments from our customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

As of the adoption date of ASC 606, we had only one contract with a customer, Kowa Pharmaceuticals America, Inc. (Kowa), that had not been completed. Based on our review, we concluded there was no significant change in applying ASC 606 to the contract with Kowa and no amounts have been recognized within “accumulated deficit” in the condensed consolidated balance sheet related to the adoption of the new standard.

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Results of Operations

General

To date, we have not generated any income from operations. As of March 31, 2018, we had an accumulated deficit of $467.5 million, primarily as a result of expenditures for research and development and general and administrative expenses from inception to that date. While we have generated revenue from our license arrangement with Kowa and may in the future generate revenue from a variety of other sources, including additional milestone payments from Kowa and license fees and milestone payments in connection with other strategic partnerships, arhalofenate and seladelpar are at a mid-level stage of development and our other product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate sufficient revenue to achieve and sustain profitability. Our results of operations for the three months ended March 31, 2018 and 2017 are presented below:

Three Months Ended

March 31,

2018

2017

Variance

($ in thousands)

Collaboration revenue

$

—

$

4,793

$

(4,793

)

Operating expenses:

Research and development

9,477

4,041

5,436

General and administrative

3,373

3,701

(328

)

Loss from operations

(12,850

)

(2,949

)

(9,901

)

Interest income (expense), net

500

(268

)

768

Other expense, net

(4,655

)

(2,134

)

(2,521

)

Net loss

$

(17,005

)

$

(5,351

)

$

(11,654

)

Collaboration Revenue

Collaboration revenue for the three months ended March 31, 2018 and 2017 was none and $4.8 million, respectively. We recognized collaboration revenue in the three months ended March 31, 2017 following the delivery of the license and knowhow deliverable identified in our Kowa license and collaboration agreement.

Research & Development Expenses

Conducting research and development is central to our business model. For the three months ended March 31, 2018 and 2017, research and development expenses were $9.5 million and $4.0 million, respectively. Research and development expenses are detailed in the table below: